Treasurys choppy after tame PPI

CBS.MarketWatch.com

WASHINGTON (CBS.MW) -- Treasury yields bobbed at mixed levels Friday as the market assessed tame wholesale prices but remained unclear on what action the Fed might take later this month.

The producer price index for May was flat and without its volatile food and energy measures rose a modest 0.2 percent, not far off economists' projections for a 0.2 increase overall and a 0.1 percent rise at the core. Check out and .

But analysts said the market is awaiting next week's consumer price and retail sales data for a better indication of interest-rate policy when central bankers pull up around the conference table June 27-28.

Slowing consumer demand has been the Fed's aim with six rate increases in a year. Recent Fed rhetoric suggests some policymakers believe growth may have to slow a bit more in order to completely wring out any lingering inflation risk. Still, signs of growth moderation in most of the recent economic reports -- with many covering a period even before the central bank's rare half-point hike -- make the Fed's next move anybody's guess.

At last check, the benchmark 10-year Treasury note was up 2/32 with its yield at 6.13 percent or virtually unchanged from settlement in New York hours on Thursday. The 30-year bond gave up 2/32 to yield 5.89 percent, down 1 basis point from a level seen at the Thursday U.S. close.

Moving down the yield curve, the 5-year was up 1/32 at 6.37 percent. The 2-year eased 2/32 at 6.55 percent.

The difference in yield between the bellwether 10-year note and a 2-year security was unchanged at a negative 41 basis points.

Stock effect

Equity weakness is seen taking some of the bite out of consumer spending. That said, stock strength stokes concern among fixed-income investors that a so-called "wealth effect" will boost demand despite rising interest rates.

The Dow Industrials
DJIA, +0.34%
lost 54 points, or 0.5 percent, to 10,614. The Nasdaq Composite
$compq
tacked on 49 points, or 1.3 percent, to 3,874. See .

In the currency market, dollar/yen rose 0.9 percent to 106.85 while euro/dollar shed 0.8 percent to 94.65 cents. The euro fell on Thursday after four straight days of gains even as the European Central Bank raised rates by a larger-than-expected 50 basis points.

Driving the dollar higher was disappointment that Japan's gross domestic product release for the first-quarter failed to meet expectations. the country's January-March GDP rose 2.4 percent -- the first positive growth rate in three quarters. See full story. Annual GDP figures for the 1999-2000 fiscal year showed a 0.5 percent growth rate, short of the government's 0.6 percent target.

Treasurys rallied over the last few weeks as a host of economic data capped by a friendly jobs report supported a slower growth scenario and stoked thoughts the rate tightening cycle may be coming to a close. But the market has had trouble building on those gains this week, especially as central bankers said they weren't convinced the desired slowdown has completely taken hold.

Speaking in Boston late Tuesday, Federal Reserve Governor Laurence Meyer sounded more hawkish on interest rates than markets were expecting. He said the central bank may still have to slow growth even more to eliminate any lingering inflation risk.

Earlier on Tuesday, San Francisco Fed President Robert Parry said that it was evident the economy slowed but it was "too soon for the Fed to declare victory" on inflation.

"The inference we draw from Mr. Meyer's speech and those of his colleagues its that FOMC members are thus far unconvinced that the modest industrial slowdown implied by sliding NAPM, will be enough on its own," said Ian Shepherdson, chief economist with High Frequency Economics. "This doesn't sound to us like a recipe for guaranteed steady rates" on June 28.

"While we still think is the most likely outcome," he continued, "especially if as we expect, next week's retail sales figures are soft and the [consumer price index] is benign, it is not a done deal."

Federal funds futures -- which gauge market expectations for the central bank's short-term borrowing target -- put the odds of a June increase at 50-50.

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